Federal Budget 2018 should be great for ASX stocks – if it gets through

Federal Budget 2018 stock market ASX
The 2018 Federal Budget looks positive for ASX-listed stocks.

For shareholders, Federal budgets normally come in two types – those that set a general business tone and those that are full of specific measures that hit different sectors.

This budget falls solidly into that first category and the “general business tone” should be quite a positive one, if it passes in to law.

Of course getting legislation through the senate is in the lap of complex and unpredictable political machinations involving many players but by tying together tax cuts for those on low incomes with the entirety of the business tax cuts and an overall three-phase, seven-year plan, at least the Turnbull Government is giving its tax plan a red hot go.

Assuming it is implemented as read, the budget should be positive across all share market sectors, with the possible exception of banking and fund management which is facing tighter regulation, higher costs and whatever raft of profit-diluting “nasties’’ await to be implemented after the Royal Commission.

Tax cuts for individuals and for companies

That positivity is two-fold: firstly, flowing from small but generally well targeted tax cuts for low and middle income workers, and, secondly, by bringing the business tax rate down a little closer to our overseas competitors over-time.

Personal tax cuts should be positive for consumer spending and investment across the board, particularly with interest rates remaining low for the foreseeable future and the job market continuing to show growth in the number of jobs and participation in the workforce.

In particular, measures to move tax thresholds higher will remove some of those blockages to workers wanting to raise some extra cash by working overtime or going for a promotion.

Business tax cuts should result in higher dividends for shareholders – albeit with a lower franking credit – and to more investment as companies have greater certainty about their future finances and the economy more broadly.

Older Australians are being lured back to work through some pension sweeteners and the reduction in bracket creep – which pushes workers into ever higher tax brackets – should provide some positive incentives.

Projections for deficit, debt and an eventual surplus a positive

The projected fall in the Budget deficit to A$14.5 billion in 2018-19 and a probable fall in net debt will take a little funding pressure off the private sector and the path to surplus in 2019-20 seems a little more achievable and a little less blue sky than some previous budgets, given the current strength of tax revenues.

The forecast for a mild rise in inflation and GDP growth is another positive if it comes to pass and the expanded spending on infrastructure should be a solid impetus to the construction sector which is preparing for a potentially weaker period of housing construction.

The crackdown on the black economy is also a positive for genuine businesses, given that these black economy participants tend to compete unfairly.

Once again, the moves to streamline and shorten tax reporting for small businesses, combined with current plans to reduce taxes over time, should help to support the biggest engine for employment we have.

In summary, it should be a positive budget for business and share market investors across the board, but the picture is certainly clouded by the looming election next year and the political machinations that may water down key elements of the package so that it makes it through the senate.

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